1. What is Risk-adjusted Yield?

Definition: Risk-adjusted yield (RAY) measures the return of an investment relative to its risk, calculated by dividing the excess return (over risk-free rate) by the standard deviation of returns.

Purpose: It helps investors compare investments with different risk profiles by showing how much return is generated per unit of risk.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( RAY \) — Risk-adjusted yield (dimensionless)
• \( R \) — Expected return (%)
• \( R_f \) — Risk-free rate (%)
• \( \sigma \) — Standard deviation of returns (%)

Explanation: Higher RAY values indicate better risk-adjusted returns. A RAY of 1 means 1% excess return per 1% of risk.

3. Importance of Risk-adjusted Yield

Details: This metric is crucial for portfolio management, allowing comparison between high-risk/high-return and low-risk/low-return investments.

4. Using the Calculator

Tips: Enter the expected return (%), risk-free rate (default 2.5%), and standard deviation (default 5%). Standard deviation must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: What's a good RAY value?
A: Generally, RAY > 1 is good, > 2 is excellent, and > 3 is outstanding. However, this varies by asset class.

Q2: What risk-free rate should I use?
A: Typically use 10-year government bond yields (default 2.5%). Adjust based on current rates and your country.

Q3: How do I find standard deviation?
A: Calculate from historical returns or use estimates from similar investments. Many financial websites provide this data.

Q4: Can RAY be negative?
A: Yes, if expected return is below the risk-free rate, indicating poor risk-adjusted performance.

Q5: How does this differ from Sharpe ratio?
A: This is essentially the Sharpe ratio without annualizing the returns, making it simpler for quick comparisons.